RBI to reintroduce inflation-indexed bonds

Mumbai: RBI Governor Duvvuri Subbarao said the central bank is planning to introduce inflation- indexed bonds, under which an investor would get a return on the basis of the prevailing inflation at the time of maturity.

"One cause of concern is whether in a period of relative high inflation ... whether they (inflation-indexed bonds) will be successful. We will think through this... but certainly we will introduce that," Subbarao told a national finance symposium organised by the Indian Institute of Foreign Trade and the Bombay Chamber of Commerce here.

When bonds are indexed to inflation, the return on them will be linked to the prevailing rate of inflation at maturity of the instrument on both the coupons as well as on the principal repayments at maturity.

The existing bonds are capital-indexed and only protect the capital/principal against inflation, but an IIB (inflation-indexed bond) will be offering investors inflation-based returns. The index in this case will be based on the monthly wholesale price index.

Pointing out that the past experience with such an instrument was not received well, the Governor said, "We have diversified the instruments for government borrowings now.

The zero coupon bonds, capital indexed bonds and now there is a proposal to introduce inflation indexed-bonds.

"We tried those inflation indexed bonds earlier, but it did not work out very well but now we want to reintroduce them".

Source: Financial Express